How To Write The Financial Section Of A Business Plan

The financial section of a business plan is extremely important. It is one of the, if not the, most crucial part of a business plan that prospective investors or financiers look at. Even in terms of subsequent commencement and operation of a business the financials are central to success. It is the one section of a business that can determine your fate whether you are seeking funding or you are putting together the financial framework of your business. In this article we shall discuss how to write the financial section of your business plan.

Important Things To Consider

There are things you must be aware of or well-versed in when it comes to writing the financial section. For starters, you must have an appreciable knowledge of accounting – no much but just the basics. There are actually accounting standards you must be abreast with. In the event that you are not we advise you be assisted by accounting experts. Depending on the nature of your business plan you will include different types of details. For example, when you are starting out, most of, if not all, of your financial details will be projective. If you have been operating before there are details of your financials (to date) that you will have to include.

Contents Of A Financial Section

There are 5 basic components that should constitute a financial section. These are income statement, cash flow statements, balance sheet, break-even analysis and budgets (the budget can either be for initial or running operations). As we mentioned before, what you put on those financial statements will depend on whether you are starting out from scratch or you have been operating before. If it is the former you will find most the financial statements have to be projected or forecasted – usually covering a period of 3 years. Even when you have been operating before forecasting will still be done. It is worth noting that sensitivity analysis and ratio analysis can be included in the financial section – will briefly explain them later.

Parts Of The Financial Section Of A Business Plan

The financial section of a business plan typically has the following parts, Balance Sheet, Income Statement, Cash Flow Statement, Breakeven Analysis, Sensitivity Analysis and Ratio Analysis. We shall cover more detail on what they are about as we discuss the steps to follow in writing a financial section of a business plan.

Steps To Follow When Writing The Financial Section

Step 1 – Do Your Sales Forecast

This is a projection of sales you anticipate to make in the near future. The standard practice is to make projections for the next 3 years. In doing your sales forecast you must ultimately calculate gross margins (sales minus cost).

Step 2 – Do Your Budgets

Here you are outlining the costs you will incur in a bid to realize sales. Caution must be exercised to ensure you do not overlook certain costs that will affect your business. Some costs are variable and some are fixed – they all must be explored here.

Step 3 – Put Together The Cash Flow Statement

Cash flow simply deals with the movement of money into and out of the business. The rule of thumb is start off with a cash flow statement for 1 year. You have to break it down into the 12 months. It is important to remember that there are several metrics that feed into the cash flow statement. The details from the first 2 steps we discussed have a bearing on this step 3. Be vigilant here because any slight mistake becomes a chain reaction that will affect the whole financial section.

Step 4 – Do The Income Statement (Projected)

This deals with metrics such as revenue, the cost of realizing that revenue and the ultimate profits over a projected time span. If you have ever heard of a pro forma profit and loss statement – that is what we are dealing with here. There is projection which should typically be for the coming 3 years. The pro forma profit and loss statement is the culmination of outputs from step 1, step 2 and step 3. Step 1 deals with revenue, step 2 deals with expenses and step 3 cover the profits aspect. No wonder why we underscored the importance of diligence because these things are interconnected.

Step 5 – Do A Balance Sheet

The balance sheet is central to valuating a business i.e. its net worth. It is possible in some cases to cover details which would otherwise be here in the income statement. In the event that they cannot be included there, they are then detailed here in the form of a balance sheet. We are essentially referring to assets and liabilities. If they are not factored in they will corrupt the whole financial section. The net worth, essentially the equity, will come from subtracting the total liabilities from the assets.

Step 6 – Do Your Analyses (Break-even, Sensitivity and Ratio)

Break-even analysis deals with calculating the point at which revenue realized equals the costs. Thus this analysis seeks to establish how much revenue must be realized to get the business to a point where from after which profits can start to be realized. Sensitivity analysis involves calculations that seek to establish the effect of certain variables on other variables. Ratio analysis deals with financial ratios that give insights on the particular business. An example of a financial ratio is the gross profit ratio which is gross profit divided by net sales multiplied by 100.

When writing the financial section of your business it is important to be factual. Make sure that the numbers add up; there must also be a balance. Do not exaggerate the numbers – either by inflating or deflating them. Often times people think that when you give an impression of huge returns investors or financiers will be impressed. As much as they would love that but the principle is that you should strive to be factual and realistic. Remember to never hesitate to seek help from those who know.